Retail insolvencies are expected to increase in Canada in 2015, as many businesses ́ profit margins are under pressure and competition is high.

Market performance snapshots

Canada

Retail sales decreased in December 2014

Longer payment terms requested by retailers

More payment delays and insolvencies expected

In 2014, Canadian retail trade grew 4.6% (to CAD 505.5 billion), following growth of 3.1% in 2013. Furniture and home furnishing retail showed strong gains, growing 3.8% (to CAD 15.9 billion); more than double the growth of 1.3% experienced in 2013. Electronics and appliances retail recorded slower, but acceptable growth of 1.5%, increasing to CAD 14.9 billion. Sporting goods, hobbies, book and music store retail showed significant growth of 5.6% in 2014 – increasing to CAD 11.5 billion. At the end of 2013, the Bank of Canada cautioned consumers about high debt levels, indicating that restraint in household spending was needed. This message appeared to take hold in 2014 as household debt levels stabilised, with no apparent negative impact on retail sales in the first three quarters of the year. However, Canadian consumer confidence has weakened in Q4 of 2014 and remains volatile, mirroring concerns over the state of the Canadian economy, as economic growth is expected to slow down to 1.9% in 2015. According to Statistics Canada, retail sales already decreased 2.0% year-on-year in December of 2014 – the largest decrease since April 2010.

Payment delays in the Canadian consumer durables retail subsector have increased in H2 of 2014 – and with retail sales dropping in December, further increases in reported delinquencies are expected. Retailers are moving away from requesting cash discounts (advanced payments) from suppliers and are requesting longer terms of payment, e.g. pay when sold terms of sale. This could lead to increased payment delays; however, as many retailers tightly manage their inventory levels (preventing oversupply issues), payment re-scheduling is not yet (that) problematic.

According to the Office of the Superintendent of Bankruptcy, retail insolvencies decreased 5.7% year-on-year in 2014; from 528 to 498 cases. However, at the same time, some larger multi-location chain-stores have filed for creditor protection/bankruptcy or announced store closures in late 2014/early 2015. It is expected that consumer durables retail insolvencies will increase in 2015, as many businesses´ profit margins are under pressure, competition is high and the pressure on brick-and-mortar stores from online retailers increases. Weaker players that cannot adjust to the changing market conditions will face major problems.

Given those developments and the recent downswing in consumer sentiment, our underwriting stance has become more restrictive. We are closely monitoring economic issues that could negatively impact the industry’s performance, e.g. increases in unemployment, volatile Canadian dollar, rising inflation and/or other adverse economic trends resulting in weaker consumer confidence.

Our customers selling into this sector typically have longer risk horizons (terms of sale, maximum extension periods, pre-credit coverage) and seasonality issues. For buyer risks where the credit and/or financial information is not fully supportive of the cover requested, the quality and capabilities of our customer’s credit department is taken into account: as effective credit management, coupled with high demand products, can be strong loss mitigating factors. To assist customers, underwriters make themselves as available as possible to explain the rationale for their decisions.